MARKET WATCH: Economic slowdown undermines crude oil prices

The front-month crude oil contract fell 1.8% Mar. 22 on slowdowns in Chinese and European manufacturing, wiping out the gain from the previous session in the New York market.

“Also fueling [an] energy stock selloff was the weekly natural gas report of a larger-than-expected injection that sent the commodity down nearly 4%,” said analysts in the Houston office of Raymond James & Associates Inc.

James Zhang at Standard New York Securities Inc., the Standard Bank Group, said, “The oil market came under heavy pressure yesterday following downbeat Purchasing Manager Index (PMI) surveys from both China and Europe, including the Euro-zone’s main economic engines, Germany and France. The PMI surveys suggested that the manufacturing industries in China and Europe are likely to contract in the coming month.”

Olivier Jakob at Petromatrix in Zug, Switzerland, said, “With current oil prices this is very probably just the beginning of the economic slowdown as many emerging countries have still to adjust their domestic oil prices or face greater subsidy pulls on the budget. If oil prices were under pressure yesterday, they are not out of their recent trading range, and a hard sell-off remains difficult when the markets have also to price the potential for an upcoming war with Iran. The Saudi oil minister might be right in saying that current fundamentals do not justify the current price of oil, but the futures markets is anticipatory by nature and is currently pricing the incapacity of Saudi Arabia to replace Iran when that country is taken out. That disconnect between the current supply and demand and the anticipated supply and demand should in our opinion continue to work against a backwardated structure.”

The European Union is expected to rule today that when its embargo takes effect July 1 European companies can issue insurance on cargoes of Iranian crude not sailing towards Europe. “Meanwhile, it is interesting to note that China is becoming increasingly irritated against the US-EU embargo and sanctions against Iran,” Jakob said. “China is now more dependent on the Persian Gulf area than the US and having the West control what oil comes out…of that region will become an increasing source of tension this year and in the years to come between China and the West.”

Government officials from France, South Korea, and the UK recently were quoted by the press as considering a release of strategic petroleum reserves as a means of bringing down oil prices, although the International Energy Administration dismissed speculation of “imminent” action.

Zhang said, “The front-end of the Brent curve remained firm, supported by positive refining margins in Europe…. Good refining margins also appear to have halted the rapid decline in the Urals price differential over dated Brent.”

He reported total petroleum product stocks in the Amsterdam-Rotterdam-Antwerp region and in Singapore are at the high-end of their respective 5-year ranges. “Gasoline stocks in Europe and middle-distillate stocks in Asia are the only two main product groups showing relatively low stocks by historical standards,” he said. “This suggests that high margins are not really driven by improved product demand but rather by reduced refining capacity and the weakness in physical crude prices such as the very low Urals differential.”

In other news, industry officials and analysts dismissed President Barack Obama’s Mar. 22 campaign stop in Cushing, Okla., as essentially a photo opportunity. “There was nothing more in the speech than the commitment to have federal authorities do their best to allow as quickly as possible the start of the construction of the XL pipeline from Cushing to the US Gulf Coast. That will not change much given that federal authorization was not supposed to be any problem for that leg of the pipeline,” Jakob said.

Energy prices

The May contract for benchmark US light, sweet crudes fell $1.92 to $105.35/bbl Mar. 22 on the New York Mercantile Exchange. The June contract dropped $1.91 to $105.84/bbl. On the US spot market, West Texas Intermediate at Cushing was down $1.52 to match the $105.35/bbl front-month futures closing on NYMEX.

Heating oil for April delivery declined 3.75¢ to $3.18/gal on NYMEX. Reformulated stock for oxygenate blending for the same month decreased 1.75¢ to $3.34/gal.

The April natural gas contract returned to its downward trend, dropping 9.1¢ to $2.27/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., lost 5¢ to $2.14/MMbtu.

In London, the May IPE contract for North Sea Brent retreated $1.06 to $123.14/bbl. Gas oil for April fell $13 to $1,013.75/tonne.

The average price for the Organization of Petroleum Exporting Countries’ basket of 12 benchmark crudes lost $1.12 to $121.79/bbl.